Fitch Reminds U.S. To Mind its Debt Or Face A Downgrade

By Michael Aneiro

With focus on the sequester this week, Fitch Ratings is out with a report today that reiterates previously issued warnings to the U.S. government to get its debt situation in order. Some excerpts:

The suspension of the debt limit until 19 May 2013 has reduced the near-term pressure on the US “AAA” rating. Fitch Ratings does not anticipate a repeat of the debt ceiling crisis of August 2011 but a failure to raise the debt ceiling in a timely fashion will prompt a review and likely downgrade of the US sovereign rating.

Implementation of the automatic spending cuts – the sequester – and a government shutdown would not prompt a negative rating action. But such an outcome would further erode confidence that timely agreement will be reached on additional deficit reduction measures necessary to secure the “AAA‟ rating.

…. [E]liminating the sequester without putting in place equivalent deficit reduction would imply higher deficits and debt than currently projected and increase the pressure on the US sovereign ratings.

The key driver of Fitch‟s sovereign ratings of the US is the future path of government deficits and debt. Under Fitch‟s base-case scenario and under current policies, federal debt held by the public is set to stabilise in 2014-2015 before resuming its upward trend in the latter half of the decade to beyond 80% of GDP. Including the debt of states and local governments, general government gross debt (GGGD) is projected to reach 110% of GDP; a level Fitch does not consider consistent with the US retaining its “AAA‟ status.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.